CareCloud, Inc. (NASDAQ:CCLD) Q2 2023 Earnings Call Transcript August 5, 2023
Operator: Welcome to the CareCloud, Inc. Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host, Kim Blanche, CareCloud’s General Counsel. Ms. Blanche, you may begin.
Kimberly Blanche: Good morning, everyone. Welcome to the CareCloud’s second quarter 2023 conference call. On today’s call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer, President and Director; and Larry Steenvoorden, our Chief Financial Officer. In addition, Bill Korn, our Chief Strategy Officer, will be available for the Q&A portion of the call. Before we begin, I would like to remind you that certain statements made during this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts made during this conference call are forward-looking statements, including, without limitation, statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook and potential organic growth and acquisitions.
Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as to the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our press release and reports filed with the Securities and Exchange Commission, where you will find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from these forward-looking statements.
For anyone who dialed into the call by telephone, you may want to download our second quarter 2023 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on News & Events, then click IR calendar, click on Second Quarter 2023 Results Conference Call and download the earnings presentation. Finally, on today’s call, we may refer to certain non-GAAP financial measures. Please refer to today’s press release announcing our second quarter 2023 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. And with that said, I’ll now turn the call over to our CEO, Hadi Chaudhry. Hadi?
Hadi Chaudhry: Thank you, Kim, and thanks to all of you for joining our second quarter 2023 earnings call. Before I jump in, I would like to take a minute to introduce Larry Steenvoorden, who joined us in July as our new Chief Financial Officer. Larry brings with him extensive experience he has spent time as a CFO in several different areas of the health care space. Our team is looking forward to working with him as Bill transitions into his new role as Chief Strategy Officer. He will be working closely with Larry to get him quickly up to the speed. We have several meaningful developments that will contribute to our long-term success to discuss today. But first, I will start by providing a quick overview of our quarterly results.
The second quarter revenue came in at $29.4 million and adjusted EBITDA came in at $3.8 million. This compares to revenues of $37.2 million and adjusted EBITDA of $7 million in second quarter last year. Taking a step back and looking at the quarter as a whole, there were a few main areas that contributed to these numbers coming in lower than the prior year period, which includes softness in medSR professional services, a slower conversion ramp for wellness revenue and the loss of revenue from two large customers due to health system mergers, as previously announced. Larry will go into further details on these developments and provide insight to the results. Despite these short-term challenges, our core tech-enabled RCM offering is performing well and meeting the evolving needs of our providers.
We believe that we have taken the necessary actions to address the near-term issues we are facing, and over the long-term, focus on several emerging avenues of growth that include our generative AI offering powered by our relationship with Google, our Wellness solution, which is gaining more attention in the market and what could be a meaningful opportunity in the Middle East. Turning now to the launch of our new generative AI product. I want to provide more detail on our recently announced partnership with Google Cloud with the goal of making it easier for doctors and clinicians to access essential information. We are actively working on integrating Google Cloud’s advanced generative AI and enterprise search technology into CareCloud solutions.
Once launched, our AI model will assist the physicians with data-informed personalized treatment decisions. One of the major advantages of this collaboration in the nearly 20 years of CareCloud’s de-identified clinical data and financial information, which will be used in a HIPAA compliant fashion to train Google’s generative AI models within CareCloud solutions. This valuable data includes insights from small and medium-sized medical practices that haven’t previously been used for generative AI. Current health care AI models have been trained primarily with health system data. Our partnership allows us to fill an important gap in the industry and create more comprehensive AI-generated information for our target market. The first CareCloud solution using generative AI will focus on clinical applications and is set to launch in the coming months.
We will start by training Google’s generative AI models with our clinical data. This will enable our solutions to use a patient’s current and past clinical data to create personalized care plans for that specific patient, enabling the physician to make more informed decisions for that patient. These plans will be tailored to each patient’s medical history and current symptoms, including medication recommendations, lab orders, diagnosis and procedures. Eventually, the offering will also enable the system to give patients personalized estimates of their insurance coverage and out-of-pocket expenses, helping them make informed decisions about their health care. We plan to charge a reasonable license fee for this smart assistant addition and are exploring different licensing models or user fees, similar to Microsoft recent launch of Copilot.
The overarching goal of this partnership with Google Cloud is to transform health care delivery through generative AI technology for the broader market beyond just CareCloud’s ecosystem. I now want to provide you an update on our UAE opportunity. As we discussed last quarter, we are continuing to explore opportunities for expansion in the Middle East. We previously mentioned that we were close to completing the establishment of an entity in the UAE to capitalize on the opportunities in this market. I am pleased to report that we have successfully established a branch office in Dubai and received our license to conduct business in UAE. In May, we attended the Precision Med Conference at Dubai World Trade Center and then the MENA Hospital Project Conference in June to start building relationships with our partners.
We are now in the process of recruiting the best local talent for our business development team with the primary goal of developing new business relationships within the Gulf Cooperation Council, which is comprised of six countries. CareCloud is uniquely aligned to take advantage of the opportunities in this market. I also want to highlight that on the marketing front, we recently revamped our entire corporate website. We updated the site to not only include all of our brands, solutions and services, but also optimize it by end market and category to make it easier for our customers and partners to navigate. We believe this will make for a more enhanced user experience. Next, I would like to provide an update on the progress we have made on bookings conversions and new customer go-lives.
For our core tech-enabled RCM, we have gone live with 95% of the potential revenue we booked last year compared to 88% last quarter. On an annualized run rate, we have recognized 94% of those potential revenue from the live clients. In our Wellness solution, we have gone live with 93% of the potential revenue, also in line with last quarter, while the percentage of annualized run rate revenue increased from 7% to 23%. We still believe this is a meaningful opportunity for us, but the ramp is taking significantly longer than we initially anticipated. Our Wellness offering represented a paradigm shift of how people treat chronic illnesses, getting them into a monthly virtual checkup routine in order to proactively manage their illness. Lastly, in Force, which is our staffing augmentation solution, we have gone live with 96% of the potential revenue, same as last quarter, but the percentage of annualized run rate revenue has increased from 4% to 65% at the end of the second quarter.
The increase was driven by one of the contracts we noted last quarter going live, a new client starting to ramp. Overall, out of the total recurring bookings we signed in 2022, 95% of the potential revenue has gone live with us in some form or fashion, up from 92% last quarter. In the second quarter, on an annualized basis, we recognized 62% of the potential revenue opportunity from those clients that have gone live compared to 44% last quarter. Turning to 2023 bookings. We are experiencing further bookings growth with a meaningful increase in first half 2023 bookings compared to the first half of last year. Notably, we are signing that new business more efficiently as we have seen a year-over-year decline in our customer acquisition cost. In summary, during the quarter, our core tech-enabled RCM business is performing well, but we did experience some softness in two of our newer innovative business lines, Wellness and medSR professional services.
As we look to the second half of the year, we face some continued headwinds in those businesses and have adjusted our 2023 guidance accordingly. We believe that we are past the low point and I believe that we have taken the right steps to stabilize those business lines in the second half. Now I will turn the call over to Larry for a deeper look into our second quarter results and annual guidance. Larry?
Larry Steenvoorden: Thank you, Hadi, and hello, everyone. I appreciate the kind words from those of you that have already reached out, and I’m excited about getting started in the new seat. CareCloud’s strategy is focused on being the front runners in the market and it’s an exciting time to join the company and a very motivated and passionate team. With that, let me turn to the financials. Revenue in the quarter was $29.4 million compared to $37.2 million in Q2 2022. The year-over-year decline is primarily a result of the factors that Hadi mentioned, softness in medSR and a slower conversion ramp for Wellness revenue, as well as the loss of revenue from two large customers due to health system mergers. Regarding medSR, after the acquisition, a large EHR vendor stopped allowing their clients to contract with us for professional services because they viewed CareCloud as a direct competitor in the EHR space.
We saw the impact of this play out in the last quarter. In light of this, our team started to establish stronger Meditech relationships and leverage more RCM cross-selling opportunities. The expectation was that through these relationships and with the organic sales, the gap could be bridged to deliver growth as originally projected. However, this did not materialize. We still believe this is the right approach to get us back on track. And in light, we anticipate medSR’s MediTech-related revenue and RCM revenue will increase for the full year, but it will not be enough to offset the decline in professional services this year. The second area identified was in Wellness. The real live ramp did not pan out as steep as initial forecast predicted.
Now that we have a year of experience and more data is available, it is becoming clear that it will take longer to migrate into revenue. Going forward, we are now able to use this real live data in our forecasting and are confident about this patient population opportunity, but the ramp will take longer. Adjusted EBITDA of $3.8 million reflects a 13% margin for the quarter. This compares to $7 million and 19% in Q2 2022. The decline in quarterly EBITDA was a combination of lower revenue and related margins as we continue to invest in sales and marketing and R&D to drive future growth. We ended the quarter with $7.7 million in cash and net working capital of $8.2 million. Cash provided by operations was $6.4 million, offset by cash used in investing and financing activities of $7.1 million.
In addition, we ended the second quarter the same as the first quarter, with $10 million drawn on our $25 million line of credit. Now turning to guidance. As mentioned earlier, there are a few areas in which results differed from expectations. For medSR, we expect the impact will be approximately $12 million deviation from our projected plans on an annualized basis. As I discussed earlier in more detail, for Wellness, we anticipate it will be approximately $4 million short of our original forecast. We now have real live data to help us project its contributions in a more conservative and accurate way. And lastly, it was planned to backfill approximately $8 million of revenue from the previously mentioned customer health system mergers organically, but this is not materializing at the expected rate.
Additionally, I’d like to provide an update on Force, our staffing augmentation service, which was discussed last quarter. The large contract that we signed late last year with a well-known publicly traded health care technology company was delayed in the preproduction phase due to the customer focusing on other priorities. While this led to a slower-than-expected time line, we are pleased to say that we went live on August 1. Taking into account all of these variables, we will be adjusting our annual guidance accordingly. We now expect full-year revenue of $120 million to $122 million and adjusted EBITDA of $15 million to $17 million. While the fundamentals of the business are solid, we have undertaken a deep dive into expenses and capital spend to scale the business accordingly and improve profitability for the second half and into 2024.
We still see plenty of opportunity for our solutions moving forward, and we’ll use our steady core RCM business as well as developing projects such as physical therapy, our AI solution, the opportunity in the Middle East and the Wellness ramp as a strong foundation from which to grow. That concludes my prepared remarks. In closing, I want to reiterate that like the entire team, I’m very motivated to be in this role and see the vision the company has in sight. I’ll now turn the call over to Mahmud for his closing remarks. Mahmud?
Mahmud Haq: Thank you, Larry. As Hadi expressed earlier, we feel that our solutions are well positioned in the market. We are executing on the plan to overcome our short-term challenges, and there are several opportunities that will benefit us over the long-term. I would like to thank our employees, customers and shareholders for all they do to support the CareCloud mission. Thank you. Operator?
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Q&A Session
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Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for analysts. [Operator Instructions] Our first question comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.
Jeffery Cohen: Hey. Good morning. Hi. Hadi, Larry and Bill. How are you?
Hadi Chaudhry: Good morning, Jeff. Yes, we are very well. Thank you. How are you?
Jeffery Cohen: It’s fine. So I know that Larry went through a few of the shortfalls in some of the contracts on time and congrats on buying up the Force contract. But Larry, I guess the question is any macro themes that you’re seeing over the past quarter as far as position or organization spending patterns that you can talk about?
Hadi Chaudhry: Can you able to little elaborate it further, Jeff, please?
Jeffery Cohen: Just from a macro standpoint, are you seeing any themes out there as far as your space with utilization or orders that are out there in North America the past quarter?
Hadi Chaudhry: Not exactly, but we do see from the medSRd perspective, like any other consultancy businesses, some impact. But I think for us, it’s not primarily driven by the overall – the advisory and the consultancy business impact. For us, at least it’s that large vendor driven. Because you all as you understand, there are a couple of vendors, just three, which covers about 80% of the market share in that space. So if the largest one thinks that they should not be working with us, there will be a significant impact. But other than that, no, we have not.
Jeffery Cohen: Okay. And anything to speak of as far as utilization recently or any geographical strength or weakness to call out as far as specific specialties or specific geographies that you can talk about?
Hadi Chaudhry: No. Again Jeff, we have not seen any such occurrence. But I think we do see a lot of at least these discussions more towards this, the next – the upcoming technologies, I would say, between the confusion of the people and waiting for the next and the right technology to be used and more referring to these AI-based upcoming technological tools and the movement towards the value based, how the two pieces are going to get together for – and from the preventative medicine as well. But not anything specific that we have seen at least yet.
Jeffery Cohen: Okay. Great. Then lastly for us, any commentary on the regenerative partnership with Google Cloud as far as rollout and talk about which specific offerings of yours that is being embedded in and how you would expect that to play out over the coming months or quarters? Thank you.
Hadi Chaudhry: Sure. Thanks, Jeff. And if we just zoom out just to give you, first of all, the perspective of how this partnership has come together. So this was – I was able to meet earlier this year in a meeting with the CEO of the Google Cloud. The idea was that or the thought was – and if you think about CareCloud or previously known as MTBC when started in 1999, our focus was or how we started was how to focus the small to medium practices primarily and bring innovation and technology and converting them from the conventional medical billing conventional RCM into more tech-enabled RCM and providing them with the tools such as EHR and all of those. Fast forward for these last 20 years now, we have the data, the clinical and financial because of our proprietary software and the technology, we started investing, let’s say, from the last over five years by establishing our own AI or the data science department to see how we can – what we can achieve with the of our own skilled people and the skill set.
It never have been enough to get to the level of where the AI technology exists today. So when Google launched their product or whether the ChatGPT launched their product on the AI, on the generative AI, the one – if you just step back from that perspective and think about it – and let’s talk about Google. They launched their Vertex AI, which is their AI, a trained AI model and the engine. And then they started focusing on the health sector, and they’re calling it the Med-PaLM model, which is an AI trained model for the health care industry. But when we talk about it, that model is trained only on the health system side space, the larger practices. Because for the smaller ones, whether it’s Google or someone else, one, it’s a very highly regulated industry.
So in order to have an outreach or reach out to so many or thousands and thousands of those small practices and take their data and then train their AI model, it’s just not – simply not possible. So this partnership is basically Google coming with their technological, their people, their expertise and technology on the generative AI. We are coming in with the last 20 years of data and our people and the experts. And together, we are trying to produce the product. So that’s a bigger picture. What we are trying to accomplish for us in the short-term, as I mentioned, as part of the script, the – we will be providing a sort of a smart assistant in our EHR in the practice management product, which will work as – if we use the analogy of the Microsoft recent launch of their Copilot.
